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Tue, 31 Mar 2015 20:41:38 +0000en-UShourly1http://wordpress.org/?v=4.1.1Interview with Luke Lang, Co-Founder of Crowdcubehttp://socialmediaweek.org/blog/2012/01/interview-with-luke-lang-co-founder-of-crowdcube/
http://socialmediaweek.org/blog/2012/01/interview-with-luke-lang-co-founder-of-crowdcube/#commentsMon, 16 Jan 2012 17:43:43 +0000http://socialmediaweek.org/?p=11437Crowdcube is the world leader in equity-based crowdfunding. Launched in February 2011, the UK based platform has set the pace in bringing to the fore a new mechanism of raising capital for entrepreneurs and established businesses alike. Just before Christmas twintangibles managed to get the chance to speak to Luke Lang, one of its founders...

]]>Crowdcube is the world leader in equity-based crowdfunding. Launched in February 2011, the UK based platform has set the pace in bringing to the fore a new mechanism of raising capital for entrepreneurs and established businesses alike. Just before Christmas twintangibles managed to get the chance to speak to Luke Lang, one of its founders shortly after they had successfully used their own platform to raise a significant investment. This is a transcript of that interview. The audio version is available here.

TW: Luke thanks for taking the time to speak to us about Crowdcube. Can we go right back to the beginning and tell us a bit about the origins of the project?

LL: The idea behind Crowdcube has been developed by myself and my co-founder Darren Westlake. We are both experienced entrepreneurs set up business in the past, and experienced for ourselves the challenges of raising finance for a start-up and growing business can be. And it was our opinion that there must be a better way of doing things. It’s very much our opinion that business finance hasn’t really changed a great deal for the past two hundred years with bright entrepreneurs with a good idea go cap in hand to wealthy individuals looking for money and those wealthy individuals are not necessarily the best people to decide whether you have got a good idea or not. So we firmly believed that there must be a better way of doing it and a way of democratising investments so that anyone can get the opportunity to invest in small start-up and growth businesses, and really give entrepreneurs the ability to tap into new money, people who would have previously been priced out of being a business angel because they didn’t have enough savings, say £50,000 or £100,000 in the bank to invest.

Crowdcube empowers entrepreneurs to attract investment from friends and family easily, and give customers and suppliers the opportunity to become part of their business and to engage with their business on a new level. So that was essentially the core foundation of it. I guess if you wanted the two founding principles they were, firstly anyone should be able to invest, we really wanted to democratise investment and empower the general public and we coined the term “armchair dragons” so people sitting at home could make the decision if they wanted to invest, and secondly the people that did invest should get real shares in that business. So it was really important to us that those people investing were taking a real stake in the business.

TW: And that is something that is very distinct about Crowdcube isn’t it? There are other crowdfunding platforms that allow you to fund a business but Crowdcube is specifically about taking equity isn’t it?

LL: Yes taking a real equity stake was really, really important to use. You know when you’re raising money for businesses or investing you are investing for the future, you are investing because you think that a company has a future and you believe in it, and you want to be part of that future and that success. It’s very much the case that we see that there are two main reasons why people invest in a business, firstly its participation and a new level of involvement and engagement with the brand, helping the brand, advocating and supporting that company and really helping them to kick on to the next level.

So, firstly there are there these very philanthropic reasons, and those reasons are equally applied to the person investing £10,000 as £10 pounds. Secondly, for those that have traditionally invested larger sums of money, they also want to get payback they want to get a return on their investment. They are not just doing it for the from the goodness of their heart, although that may be a contributory factor, they are really keen to generate a return and those are the two core reasons as to why people are investing, and having equity is a key part of that as without it it would be difficult to attract the larger sums of investment.

TW: There is an inherent risk I suppose in it as with a reward based model, be it a “keep it all” or “all or nothing” model, if they make the target you get your reward, but with an equity model you are buying a potentially more risky investment, it could go up or it could go down. So it’s a quite a different relationship involved because of that added risk.

LL: Absolutely. We make no bones about it. It certainly is risky investing in any business, particularly start-up business, we have developed the facility for people to have rewards as well as the equity stake, so we recognise that certainly for the smaller investment between say £10 and £2-300 there was an idea that those investors should get something earlier on the process, and so get something back a little quicker so we have gone some way to mitigate those risks.

TW:So if you buy some of this equity, you register to be a member of Crowdcube to become an investor, you get access to the portfolio of opportunities, and choose your investments, buy the equity, can you sell that equity at some point?

LL: We see liquidity of investments in limited companies as a possible barrier to people investing at the moment. Currently you are very much in it for the longer term – 3, 4, 5 years up until such a point the company reaches a point to either sell, float or there is some kind of management buyout. There is the provision for dividend payment as you would get in any kind of shareholding but you are absolutely right in that at present you can’t sell.

TW: So going down the equity model that presents a lot of legislative barriers, so that must have made setting up Crowdcube a little more challenging than setting up a reward-based model.

LL: Yes it did. We spent over two years developing the model with our solicitors. It was a long and painful process and I guess a lot of people would have probably given up but between myself, Darren Westlake and our lawyers, Ashfords Solicitors, we had the tenacity and will to think that there must be a way of doing this and after numerous attempts we managed to navigate our way through the regulatory requirements and to make sure we are fully compliant and where we can’t be we outsource that to an authorised third party.

TW: Sounds like a tortuous process – when did you actually launch Crowdcube?

LL: We launched February 2011.

TW: So this coming February will be your first full year’s operation?

LL: It will yes.

TW: And how many projects do you think you will have had through by then?

LL: Well we recognised we were breaking new ground and being rather innovative so we were honest in our forecast that we would do one deal in our first year’s trading but in actual fact to date we have done 10 deals and the amount of investment we have raised for small businesses since our first deal in July is more that £2.1 Million. So it really demonstrates that there is an appetite and certainly a need from entrepreneurs for an alternative route to finance. Existing sources are not living up to their billing. Banks aren’t lending, and business angels have become, perhaps rightly, a bit more risk averse as their wealth has depleted somewhat over the past few years. So there was a real need for a new source of finance and there is a real appetite out there for people to invest in good businesses.

TW: So do you see this as a systemic and sustained change in the way that we invest for the future?

LL: We certainly believe so. We see the evolution of crowdfunding into business finance as a game changer and very much the next generation of how small and start-up businesses will raise finance in the future. We have got some big ambitions to take Crowdcube and crowdfunding for equity finance model to a new level as there is certainly the demand and a funding gap.

TW: You have already had some notable successes of course. To use the software developers phrase you eat your own dog food in as much as you raised £300,000

LL: Yes we did – last week we raised £300,000 in 10 days – 162 investors, and to be honest when we were originally developing the Crowdcube model we got an initial seed finding from friends and family and we were acutely aware that actually if there had been a Crowdcube out there at the time we would have used as a method for raising finance and we said at that point if we ever need finance in the future we need to demonstrate our willingness to “eat our own dog food” and do what other entrepreneurs are doing. In fact it was a really enlightening experience to go through it from the entrepreneurs perspective. The roller coaster ride that you embark on, the journey that you go through and the learning and understanding that we have gained from that and the insights to our systems have been really beneficial and we have lots of new improvements lined up for the New Year.

TW: So how easy is Crowdfunding? Kickstarter, who have been around for some time, reckon they have about a 43% success rate, but we get the feeling talking to people entering into crowdfunding projects be they equity or reward based that many of them seem to think that they just have to put up their project up there for the money to start rolling in, so how easy is it?

LL: It’s a good question. At the moment we really stress to entrepreneurs that Crowdcube is very much a platform for them to drive investor interest through their Crowdcube pitch, and the pitch page can list all their information, the business plan, financials and hopefully convert that interest into investment. It’s certainly no panacea by any means and there is effort involved. If you think that you are going to list the business on Crowdcube and all of a sudden you are instantly going to hit a £100,000 target that simply is not the case, unless you happen to have an absolute belter of an idea. So there is still work to be done but we see Crowdcube as a platform that empowers and enables entrepreneurs to target their friends, their family, their customers and suppliers, their existing stake holders, shareholders, communities that they are involved in and driving that traffic. We haven’t reached a critical mass where you simply stick a project on Crowdcube and it will fund, that’s not happened. It’s still very early days, but we stress it is a facility, a platform for entrepreneurs to use.

TW: So if you’re thinking of putting together a crowdfunding project, be it equity based or otherwise, having a plan for that, being aware of the amount of effort involved is an important factor?

LL: Yes exactly. Having an idea about how you are going to drive that interest. One of the things we always ask as part of our vetting process is “How are you going to drive traffic to your site? How will you sign post people? What is your reach? What networks do you have at the moment?” This is really important to us as if they don’t have that reach then they are unlikely to get on Crowdcube.

TW: And does social media factor into that?

LL: Absolutely. Personally I think that there have been a few factors in the last 3 to 5 years that have enabled crowdfunding platforms to accelerate. Firstly broadband internet penetration and speeds have increased; social media and social networking has really empowered and enabled people to push a message out further and faster than ever before and that has really been critical in the success of crowdfunding projects and also the more familiarity and happiness of using micro funding and purchasing on line– using Paypal and other similar payment tools. People are so much more comfortable with that now, whereas 3, 4, 5 years ago there was still a perceived risk.

TW: So what do you think are the common factors in both success and failure in crowdfunding generally?

LL: Firstly, you need a good idea. Be it a creative arts project on Crowdfunder in the UK or Kickstarter. The idea is really important particularly for Crowdcube, the business idea has got to be good. You’ve got to back that up with all that good information that an investor is going to need to be able to make a judgement about whether to invest or not. So you will need a well written well-presented business plan, good financial forecasts. And secondly you need to have a good team behind you, be that the entrepreneur on their own or other people from in the organisation. I always say that the power of crowdfunding is only limited by the entrepreneur or pitch owner and the idea. If you have a great idea and you can push that message out, if you can trigger a viral effect, then there is no end to what you can achieve.

TW: You mentioned there Crowdfunder – what is your involvement with that?

LL: Yes, when we were developing the Crowdcube site back in the Autumn of 2010, the regulatory framework wasn’t quite complete and we weren’t happy with it. So we were at the point we had a crowdfunding platform for businesses but we hadn’t actually launched it. So essentially the principles behind it, the software, the architecture are very similar, so we effectively cloned a site and created a crowdfunding site for the creative arts.

TW: So it’s specifically for the creative arts?

LL: Well not specifically, we don’t limit it any way. But it just so happens that creative arts it works well for them as they tend to have lots of cool funky stuff to give away as rewards for pledging money and that works for people that are interested in that . So that was launched back in November 2010 and it was one of the first UK based crowdfunding sites and continues to be one of the most popular today and we really spent no money at all on marketing it, no money on PR or advertising, it’s purely an organic engine or website because there is a need for it, it satisfies that need and it does it very effectively. So we are really pleased about how it has gone.

TW: It seems that there is an explosion of new crowdfunding sites offering all sorts of niche offerings. What do you think are the implications of that burgeoning of platforms?

LL: I think that’s a reflection of the needs that are out there and the demand effectively and at Crowdcube we welcome the competition. It will only improve the awareness of crowdfunding as a model and method of raising finance and that can only be good for everyone in the industry and help to establish it as an alternative route to finance. It’s the same in any industry, people soon start to tweak things and change things and see new opportunities so niche sites developing are not some much a common thing to occur but an obvious evolution in crowdfunding.

TW: With all the proposed legislative changes in the US – what are the implications for Crowdcube and equity-based Crowdfunding generally?

LL: Well if the changes put forward are approved I think it will have a dramatic impact on the US and probably the rest of the world as well. Crowdcube is at the bleeding edge of Crowdfunding in the UK and certainly leading the way. Now for regulatory reasons the US can’t do it but when that market opens up there is huge opportunity there. And we have certainly been approached by lots of people looking to partner with us and launch in the US and we are very keen to be involved in the US when it does happen because it is a massive opportunity and market. Interestingly we are starting to hear noises from the UK government as well which is obviously monitoring what’s happening in the UK and the US. Vince Cable last week launched a task force to look into how they can help alternative groups to finance small business and he specifically singled out crowdfunding as one of the things that they are going to look into in more detail. So certainly what we are doing here in the UK and the awareness we have generated has rippled right the way up to the corridors of power in government and they are, I’m sure, aware of what is going on in the US as well, so from our point of view it simply reiterates our view that Crowdfunding as an alternative route to finance is going to happen and is going to become big, and quite soon it will not be an alternative route to finance, it will be the route to finance.

TW: And certainly it can sit comfortably alongside other funding models of course. If you run a successful equity-based crowdfunding campaign and then go to another capital market you have got a wonderful asset there to demonstrate the willingness of people to confidently get involved with your product or service and that must be a useful thing to have isn’t it?

LL: Absolutely, absolutely! Businesses that raise money on Crowdcube, are first and foremost raising money, but they recognise that being able to tap into giving customers and people a shareholding in their business and for them to become advocates for your business is really powerful thing and from the social media point of view the publicity and the viral awareness you can create through a crowdfunding campaign can have a really positive impact on your brand and the awareness of your company.

TW: Luke thanks very much for taking the time to speak to us and tell us about equity-based crowdfunding at Crowdcube.

twintangibles is a social media research and consulting agency addressing various aspects of the impact of Social Media on business and society. Our ongoing research activity informs our consulting work. Connect with twintangibles at @twintangibles.

]]>http://socialmediaweek.org/blog/2012/01/interview-with-luke-lang-co-founder-of-crowdcube/feed/0Getting A Share- Equity-Based Crowdfundinghttp://socialmediaweek.org/blog/2011/12/getting-a-share-equity-based-crowdfunding/
http://socialmediaweek.org/blog/2011/12/getting-a-share-equity-based-crowdfunding/#commentsMon, 19 Dec 2011 19:20:05 +0000http://socialmediaweek.org/?p=10956One of the hottest debates in crowdfunding at present is around its use for equity-based funding for capital formation. And there is good reason for this. Whilst this has been permissible in some countries, it has not been permissible in the USA, where some of the most widely known and successful crowdfunding platforms exist. But that...

]]>One of the hottest debates in crowdfunding at present is around its use for equity-based funding for capital formation. And there is good reason for this. Whilst this has been permissible in some countries, it has not been permissible in the USA, where some of the most widely known and successful crowdfunding platforms exist. But that may be about to change, hence the debate.

So, we thought we could take a quick tour through the world of equity-based crowdfunding, the legislative issues, some examples, and a look at what may lie ahead. Most of the crowdfunding platforms work on the basis of some type of reward based investment– even when the subject of the investment is a commercial entity. For example, if you are putting money into an invention-based initiative that is seeking to raise enough money to take a new product to market, then typically you will receive a version of the product with some value add. You might perhaps get it cheaper than the anticipated retail price, a special edition, ahead of the market etc. in return for your “investment.”

Through the publicity generated by some outstanding successes, with people like TicTok Lunatik on Kickstarter, we are familiar with the model. But this is distinct from an equity-based model, where in return for your cash you receive equity or a share of the company as well. As a shareholder, you have a genuine and ongoing investment in, and some ownership of, the firm and those shares can go up or down in value. As we explained in the first of this series of posts, crowdfunding is different to many funding models in that it is based on the widest possible participation and tapping into “The Long Tail.” To do this, it has to reduce the barriers to participation, so it must reduce the friction and cost in the process and leverage the power of the networked engaged world where individuals are less constrained and able to re-imagine themselves into new roles, in this case as investors.

The process of investing in equity is heavily regulated in most jurisdictions and it is in this that the friction and costs typically exits and that has made it historically difficult to tap into the long tail and make crowdfunding equity sustainable. The arguments for the regulation are primarily founded in the notion of risk mitigation and fraud prevention. Rules around transparency, authority to buy and sell are complex. The trick then is to develop a mechanism that mitigates the risks, reduces the costs, and offers security. The lure of a democratised investment is not just a notion of corporate responsibility and inclusiveness, there is sound business logic in it too. The argument for wider scrutiny and endorsement of a business model has attractions for a business particularly if it is seeking to use other capital raising mechanisms as well. But a block of small loyal stable investors who are probably brand loyal and with a different expectation of return than perhaps other more traditional investment groups has many attractions.

Certainly we can look at Brewdog- a brewery in the UK- as a fascinating example of that form of inclusive crowdfunded investment. Brewdog was the first European company to run an online IPO, tapping into the asset of their brand loyal community nurtured through social media channels. The company launched its first equity sale in 2009. Not wholly successful in that it was a very expensive process, share parcels were quite costly and they didn’t reach their original target, they did however manage to raise £750,000 in 5 months. Learning from that experience, they launched a second round of so called Equity For Punks in July 2011 with cheaper minimum shares, a track record, and the use of computer shares to transact the process. They raised £500,000 in two days, £1 million in four weeks.

Trampoline is another innovative crowdfunding story. In 2009, Trampoline became the world’s first technology business to raise finance through equity crowdfunding. They are seeking to raise £1 million pounds across four rounds, the first two of which are completed. Again, this is an example of using the notion of a wider group of investors but they are not using a proprietary system to transact this and, in order to be compliant with Financial Services Authority (FSA) legislation, they are restricting the offer to people of “certified high net worth” or existing share holders.

So, the real innovation in crowdfunding beyond tapping into your tribe or casting the net a bit wider comes with the advent of turnkey platforms that open the field up to much wider groups of investors beyond the “certified high net worth” individuals- in other words, you and me.

One of the most widely known platforms that adhere to this model of equity-based crowdfunding platforms is Crowdcube based in the UK. It recently saw a world crowdfunding record achievement with the Rushmore Club raising £1 million to invest in the expansion of the bar and clubs group. Set up by Darren Westlake and Luke Lang and launched in February 2011, they are pioneering the democratising of investment in the UK.

The model that Crowdcube operates requires that, as an investor, your register with the site and deposit an amount of money into a Crowdcube account. Once done, you can review the offers and bid on the portfolio of projects on the site. For the entrepreneurs looking for investment, you need to register also and submit a proposal, which then undergoes a checking process on the part of Crowdcube, who will decide to accept or reject it into the portfolio on offer. Some key features are:

Minimum amount to be raised is currently £5,000, and there is no maximum, although Crowdcube suggest £150,000 as a typical maximum.

Minimum investment is £10, and transaction costs for companies raising money are relatively limited by comparison to a traditional equity sale process.

Set legal costs are passed on to the entrepereneur, and Crowdcube takes a fee.

As an investor, you must be UK-based, and the onus is on you to undertake your own due diligence in the investment process.

Similarly, the entrepreneurs must be UK residents, and the company, or resulting company, must be UK-registered

The site itself is deemed to be advertising shares, and as such, needs to be authorised by an FSA-registered body, in this case a firm of Chartered Accountants.

Some argue that this model is in contravention of part of the Companies Act 2006- section 7556 to be precise- which says a private company cannot offer shares to the public without going down the IPO path. But Crowdcube will tell you that they have worked with the FSA from day one. Their model has been subject to exceptionally rigorous due diligence by Ashfords Law firm, and there is nothing secretive or stealthy about it. It’s all up front, they say, and the key element in this is that investors are essentially members of a “club,” and in essence, the offer is not being made directly to the public. I am not a lawyer so don’t take my word for it, but one would have to think if the process itself were questionable, the FSA for all its faults would be taking a closer interest. As for the quality of each investment, it is a case of caveat emptor. Crowdcube themselves used this method to raise some £300,000 in the last week in return for 9% of their equity.

An alternative model is used by Symbid in the Netherlands, where they use a cooperative vehicle as the collecting mechanism for the investment- so pooling the individual contributions into a sole legal entity that invests in the entrepreneur. The idea of being in a club or community or having some buffer between the investor and entrepreneur seems key to meet the various restrictions in different geographies. It either means the process is not entirely public (the club method) or it is not an individual-direct investing (the vehicle model).

With that in mind, what seems to be happening in the USA? Possibly the most high profile initiative is the Entrepreneur Access to Capital Act H.R. 2930, introduced by Congressman Patrick McHenry, and which was passed overwhelmingly by the House (407 -17) and as explained in this video.

What it seeks to do is to amend section 4a of the Securities Act of 1933, to allow certain exemptions to registration with the Securities and Exchange Commission (SEC). It would allow entrepreneurs to run a crowdfunding programme to raise up to $2 million per year in investment capital directly from individuals without having to register the investors with the SEC. Some key features are:

To take advantage of the $2 million limit, entrepreneurs must provide audited financial statements, otherwise, without those statements, the cap is set at $1 million.

The commencement and completion of each process must be registered with the SEC, but the investors don’t need to be.

The process must reach 60% of its declared target to proceed, and the financial transactions and money management must be handled by a third party.

Each individual investor is capped at $10,000 investment or 10% of their annual income- which ever is less- however this total is linked to the CPI so is adjustable over time.

Shares cannot be sold for a year, unless the investor is an accredited or registered investor or issuer.

Additionally, there are at least two other crowdfunding related items currently in the Senate. Senator Jeff Merkley introduced the “Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act,” S 1970 (snappy title!), which would legalize and regulate the raising of start-up capital for small businesses on the Internet. Also the “Democratizing Access to Capital Act,” S 1791 (certainly pithier), was introduced by Senator Scott Brown which seeks to exempt small investments of $1,000 per investment, with total size of the stock offering capped at $1,000,000, while at the same time providing strong investor protections.

The proposal to legitimise and regulate crowdfunding for equity is not without its critics, and the debates are too long and varied to cover in this blog. But what is clear is that the appetite for finding alternative mechanisms to raise capital through selling equity is growing and is likely to continue to do so as the entrepreneurial urge is being liberated in the networked and collaborative world, and whilst traditional capital markets are constrained.

As success stories of crowdfunding generally, and equity based funding in particular, increase I can only see its popularity burgeon, and we seem to be at the threshold of a whole new, democratic and inclusive funding model.

twintangibles is a Glasgow based social media research and consulting agency addressing various aspects of the impact of Social Media on business and society. Our ongoing research activity informs our consulting work. Connect with twintangibles at @twintangibles. Co-Founder, Tim Wright, has worked as a consultant, practitioner and senior manager with a number of global commercial organisations, including Egon Zehnder International and McKinsey & Co. A graduate of both Durham University and Robert Gordons Universtity has an MBA with Distinction from the ULSM and is a past winner of the Ashridge/Guardian MBA Essay of the Year. His understanding of the Social Media Mindset as an enabler for radical and innovative change in both business and society inspired him to set up twintangibles with Daniela Castrataro in 2010, as a mechanism to commercialise their joint Social Media research. twintangibles now assists clients from all sectors generate value from the application of the Social Media Mindset.